Recurrence Relations in Finance Quiz

Which is a purpose of using a geometric recurrence relation in finance ?

• To calculate simple interest on investments

• To model compound interest for investments or loans

• To determine the principal amount of a loan

• To track the stock market prices

What can be done using geometric recurrence relations in the context of depreciation?

• Calculate the original cost of an asset

• Model reducing-balance depreciation

• Determine the salvage value of an asset

• Estimate the lifespan of an asset

What occurs in a sequence when the quantity being modelled increases or decreases by the same percentage at regular intervals?

(a)  

• Linear growth

• Geometric growth or decay
• Exponential shift

• Arithmetic progression

Which of the following is an everyday example of geometric decay?

• Appreciation of antique value over time

• Depreciation of a new car's value by a constant percentage each year

• Increase in population

• Simple interest accumulation

What is the common term used to describe the method of depreciation where the value decreases by a constant percentage each year?

(a)  

• Straight-line depreciation

• Reducing-balance depreciation
• Sum-of-the-years-digits depreciation

• Double-declining balance depreciation

Which of the following can be modelled using a recurrence relation?

• The rate of inflation over time

• A loan that compounds with a different compounding period

• The growth of a plant

• The distance traveled by a car at constant speed

What does a recurrence relation with R > 1 represent in geometric sequences?

(a)  

• Geometric decay

• Geometric growth
• Arithmetic growth

• Arithmetic decay

For a recurrence relation in the form Vn+1 = RVn, what condition must be met for it to model geometric decay?

• R > 1

• R = 1

• 0 < R < 1

• R < 0

What is the general rule about the value of R in a recurrence relation for geometric growth and decay?

• R is a variable

• R is a constant

• R is always greater than 1

• R is always less than 1

How does the amount of interest earned in each period change with compound interest?

(a)  

• It decreases over time

• It remains constant over time

• It increases over time
• It fluctuates based on market conditions